|
Current Signal Performance
|
|
|
Turbo Signal
|
Trade Date
|
Turbo Model Returns (Long & Short Strategy)
|
|
|
|
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Classic Signal
|
Trade Date
|
Classic Model Returns (Long & Short Strategy)
|
|
|
|
World
|
Nasdaq 100
(QQQ)
|
Russell 2000
(IWM)
|
S&P 500
(SPY)
|
|
|
|
|
|
Investors bounced back from the prior week's heavy mood finding some holiday cheer to begin the week as retail sales from the "Black Friday" weekend came in very strong and rumors of a fresh European pact eased concerns on that front. Stocks responded with powerful 2.5%+ gains across the board. Tuesday saw a rather tepid effort in seesaw action that began strong but petered out at overhead resistance. After the close, S&P downgraded the rating on a multitude of banks, sending futures sharply lower. However, indicative of the market's recent emotion-driven trading, futures shot back upward when China surprised Asian markets with a reduction in bank reserve requirements. This was followed by a massive coordinated liquidity effort by central banks around the world to ease pressure on European overnight bank lending. Though both of these measures are indicative of bad things happening - e.g. China would only be easing if their economy is quickly losing strength - investors were reminded of coordinated central bank action fueling a monster rally in 2009. They jumped in with both feet sending shares sharply higher and more than recouping the prior week's slide. The huge rally (Dow up almost 500 points) brought indexes all the way back to close the turbulent month of November with only modest losses. Thursday and Friday brought consolidation of the enormous gains with the European leaders and the ECB pushing hard to build on the momentum of the central bank action. A reasonably strong jobs report gave stocks an early boost Friday before sagging to a flat finish.
Just one week removed from a near breakdown, stocks offered their best week in
months. The S&P 500 (SPY)gathered in a huge +7.32% bounty with the Nasdaq 100 (QQQ) displaying a very similar +7.07% rise. The more risk-sensitive Russell 2000 (IWM) shot
higher by +10.33% (a decent year's worth of gains all in three days). The surge
higher left the SPY and QQQ above their 50 and 200-day EMAs with only the Russell
2000 failing to hurdle these reference lines.
The top 5 World ETF portfolio delivered a +7.51%
gain this week. With the Classic Model on a Sell
signal, the World approach calls for staying in cash if you follow
the "Long Only" methodology, or taking a short Nasdaq 100 (QQQ)
position if the "Long and Short" strategy is your guide. Only
"Buy and Rebalance" followers should be invested in
the World portfolio at this time. Go to the Classic Model
"Description"
page for a more detailed explanation of the strategy choices.
Our Turbo Model issued a Sell
after the close Friday and Classic continues to be a Sell.
Of politicians and central bankers
It's hard to know whether to take comfort or grumble and grouse at this week's
coordinated central bank action to provide more liquidity to global banks. The
comfort comes from a consistent policy by the U.S. Fed to backstop any and all
markets, an approach that has been in place since late 2008 and has been the fuel
of at least two rallies in U.S. stocks. Investors could choose to bet that the
Fed will find a way to step in just when the market hand-wringing is at its worst,
thus putting more emphasis on a mean-reversion strategy (betting that markets
will get stretched to the downside but the Fed will keep them from crashing).
This "fight with the Fed" strategy has certainly been a winner in recent
times, just ask Bill Gross at bond fund manager PIMCO who bet against the Fed
earlier this year only to see his fund suffer its worst underperformance ever.
Of course, as the financial crisis has spread to European shores, it's been less
clear that the U.S. Fed has any real voice in the proceedings. The European Central
Bank (ECB) has attempted to stay somewhat above the Eurodebt fray, held hostage,
perhaps, by reluctant German support for a more full-on bailout. Just as investors
recognize for the nth time that Europe is rather UNcoordinated in their efforts,
something else happens to keep the market from crashing, no matter how ridiculous
or uncredible the source/news. Still, investors can take comfort in that consistent
emotional "backstop" and bet that the reversion to the mean will eventually
come. After all, with interest rates at such low levels, the desire to find higher
returns, and hope that stocks will provide that, is great.
On the other hand, trend-followers have been grousing and grumbling throughout.
Witness our recent Classic Sell signal,
coming on the heels of an apparent breakdown in the Nasdaq Composite and, at the
least, a retest of the September lows. Time and again, just as the downtrend looks
to be settling in, some surprise shocks the market out of its stupor, almost always
from a hand-waving politician or central banker stepping forward with the words
investors long for, namely "we've got your back!". Those watching the
Eurodebt situation spiral downward step-by-painful-step marvel that investors
can one day panic at Italian bond rates going above 7% only to dismiss the same
action a few days later. This week's coordinated central bank "help"
does nothing to change the fundamental problems facing European nations saddled
with too much liability, especially in the face of diminishing growth. Nor does
China's modest reduction in bank reserve requirements this week change the fact
that their economic growth is clearly slowing and their property values likely
due for a correction. These are actions taken by institutions seeing things spiraling
out of control, seeing the ship headed for the rocks, not the actions of a captain
just altering course a little.
Still, we profit (or not) based on the movement in price alone. So, we respect
those movements as reflective of investor mood, seeking to read into them whether
it's a sustainable move or not. Besides the comforting support of central bankers,
offering further solace to investors is a sharp change in view regarding the U.S.
economy. Only two months ago, investors feared a new recession gripping the nation,
while still trying to get off the ground from the last one - a recession so severe
as to be the worst in a generation. That sour view has abruptly changed with employment
seeming to pick up after months of maddening sluggishness, retail sales defying
gravity (and those low employment numbers), and a broad set of economic indicators
suggesting continued weakness, but no return to recession.
Such crosscurrents are what markets are made of, and why we embrace the simplicity
of signal-driven trading. For those of you trying to figure out whether Classic
or Turbo is the best weather vane to monitor, we would offer
that until the market returns to moving in nice loping strides (and it will, sometime
in the coming months), Classic is in danger of being late to
the party moreso than Turbo. Turbo is built
to recognize the extremes in sentiment that characterize this type of market and
to profit from the type of sharp counter-trend rallies we have repeatedly seen
over the past few months. Of course, Models are only as good as what is put into
them. In a market dominated by words from politicians and central bankers, risk
runs high, as we've seen with investors bouncing from optimism that there is a
magic cure to relieve the debt overhang, to the realization that no such quick
cure exists. The only cure is stronger economic growth, greater fiscal discipline,
and lots of time for those "cures" to work their way through the system.
Given that we see very little evidence of either of these cures, caution remains
the watchword and the bear remains too close for comfort.
Question: What does it mean that central banks "took
steps to improve liquidity"?
The coordinated central bank action this week to make more money available
to banks worldwide, and European banks in particular, is very similar
to steps taken by the U.S. Federal Reserve during the 2008 financial
crisis. In 2008, banks in the U.S. and Europe became afraid to lend
money to each other overnight having lost trust that anyone really
knew the stability and strength of their balance sheet. It's like
loaning money to someone who asks you to ignore the crumbling shaky
facade behind them ("oh, don't mind that, she's much stronger
than she appears"). Bankers feared their counterparties could
crumble at any moment; thus, they refused to extend short-term loans
to their fellow bankers, and the financial system, built on trust
and confidence, came to a grinding halt. The Fed stepped in to be
the overnight banker, extending loans to whomever needed them, and
the system unfroze. Three years later, European banks - among the
largest in the world, it should be noted - face the same situation.
They don't trust what they can't see. And certainly take a sideways
glance at any Greek/Italian/Spanish/... bonds being put forth as collateral.
They're all carrying the same declining Greek/Italian/Spanish/...
bonds, and they all know it. With the European Central Bank (Europe's
Fed) unwilling and unable to step in as the Fed did in 2008, it turns
to the global banks together to play that role. All they did this
week, to be clear, is lower the interest rate, albeit substantially,
on short-term U.S. dollar loans to banks. But that move helps grease
the day-to-day financial system and keeps it from freezing as it did
in 2008 (it was heading that direction for European banks prior to
this week's action). As all these banks loan money globally, improvement
in their capital flows in turn helps emerging market and other borrowers;
it helps the financial system overall. The hope is that this coordinated
action including non-European central banks intensifies pressure on
European leaders to make further concrete progress in resolving their
debt crisis. The "we've done our part, now you do yours"
idea. Of course, getting clubby central bankers to agree is one thing;
getting weary and wary sovereign government leaders to come together
is far more daunting a challenge. And that remains the crux of the
difficulty that lies ahead for markets. For this week, at least, the
financial system gets a lifeline, and investors cheer.
Warm wishes and until next week.
The TimingCube
Staff
|